- Central Bank of Kenya data shows the ratio of gross non-performing loans to gross loans stood at 15 per cent in August 2023, compared to 14.2 per cent a year ago.
- This translates to more than $4 billion (KSh596 billion), an 18-year high.
- The last time Kenya’s banking sector witnessed such kind of loan default was in 2005 when it hit almost 30 per cent.
The loan market in Kenya’s banking sector is going through one of its toughest periods in nearly two decades. With interest rates on the rise and a challenging economic environment, many borrowers—individuals and businesses—are finding it hard to meet their loan obligations.
According to the most recent data from the Central Bank of Kenya (CBK), the proportion of loans that are not being repaid, known as Non-Performing Loans (NPLs), reached 15.0 percent in August 2023, up from 14.2 percent in August 2022. This represents more than $4 billion (Ksh596 billion), the highest it has been in 18 years.
The last time Kenya experienced such a high level of loan defaults was back in 2005 when it reached nearly 30 percent.
Loan defaults hit industries
The CBK’s Monetary Policy Committee (MPC) pointed out that NPLs have been rising in sectors like manufacturing, mining and quarrying, real estate, and building and construction. To address this issue, banks have been setting aside sufficient funds to cover these non-performing loans.
The surge in bad loans can be traced back to the steep interest rates imposed by commercial banks, which have placed a heavy burden on customers trying to repay their loans amidst a challenging economic climate.
Just this week, the Monetary Policy Committee (MPC) decided to keep the Central Bank Rate (CBR) at 10.50 per cent for the second time, following an increase in June from 9.50 percent. This decision was a part of the Central Bank of Kenya’s efforts to control the country’s soaring inflation.
Over the past five months, commercial bank interest rates have hovered between 16-18 percent, with certain lenders demanding repayment rates as high as 21 per cent.
As loan defaults continue to rise, banks have found themselves setting aside more funds to cover potential losses, even though the sector’s pre-tax profits have increased by 13.6 per cent, reaching Sh65.1 billion.
This new development exposes borrowers, especially households and small businesses, to the risk of auctions and property seizures as lenders take steps to recover unpaid loans.
Kenya’s inflation within the target range
Kenya’s inflation rate saw a slight uptick in September, reaching 6.8 per cent, up from 6.7 per cent in August. Fortunately, this remains within the government’s desired range. However, the price of food experienced a more noticeable increase, climbing to 7.9 percent from 7.5 per cent. This jump can be attributed to the rising costs of certain food items.
Among the culprits behind this food inflation are onions, Irish potatoes, cabbages, spinach, kale (Sukuma Wiki), and tomatoes. Interestingly, prices for staple non-vegetable foods like maize and wheat flour actually decreased due to improved supply resulting from ongoing harvests and government efforts to make essential food imports more affordable.
Meanwhile, fuel prices continued to stay high, with a 13.1 per cent inflation rate in September, reflecting the impact of rising international oil prices.
CBK Governor Kamau Thugge noted, “Non-food non-fuel inflation remained stable at 3.7 per cent in both September and August, thanks to the influence of monetary policy actions and a relatively quiet demand.”
Looking ahead, overall inflation is expected to stay within the target range, supported by decreasing food prices, particularly for maize, and government initiatives aimed at bolstering the supply of sugar through imports.
The agriculture sector rebounds
The survey of the agriculture sector conducted by CBK in the first half of September showed that the prices of key food items, particularly maize, were expected to decline further with the ongoing harvests in the main maize-producing areas of the country.
Leading indicators of economic activity for Kenya point to strong performance in 2023, supported by the continued robust growth of the services sectors, the rebound in agriculture, and the ongoing implementation of measures to boost economic activity in priority sectors by the government.
The CEOs and Market Perceptions Surveys, which were conducted ahead of the MPC meeting, revealed improved optimism about business activity and economic growth prospects for the next 12 months.
Respondents attributed this optimism largely to enhanced agricultural production, easing inflation, and improved growth prospects.
“Nevertheless, respondents’ concerns included higher fuel and electricity prices, reduced purchasing power affecting demand for products, and the possible negative effects of the El Niño weather phenomenon,” Thugge said.
High fuel prices, global uncertainties persist
Like other economies, mainly in developing and poor countries, Kenya is also taking a beating from global uncertainties, persistent inflationary pressures, and an increase in international oil prices.
In Kenya, fuel prices last month crossed the $1.34 (Ksh200) mark, the highest in history. This price jump has pushed up the cost of transport, agricultural production, manufacturing, and the cost of living at large.
According to CBK, there is also the aspect of a weak global growth outlook, geopolitical tensions mainly the Russia-Ukraine war, and measures taken by authorities around the world in response to these developments.
The back-to-back fed rate hikes in the US have had a major impact on the local currency which has weakened to a record high of Ksh148.56 to the US dollar, making imports more expensive.
“The global growth outlook remains weak, reflecting the impact of monetary policy tightening in advanced economies, weakening demand, particularly in China and the Eurozone, and heightened geopolitical tensions which continue to weigh down on economic activity,” Thugge said.
Additionally, headline inflation rates in advanced economies have remained above the respective targets, due to persistent core inflationary pressures, and higher energy costs following recent increases in the price of oil.
Global food prices have however declined from the peak levels witnessed in 2022 except for a few items such as sugar and rice.
Forex inflows rise marginally
Kenya’s exports increased marginally in the 12 months to August 2023, growing by 0.5 per cent compared to a similar period in 2022. Receipts from tea and manufactured exports increased by 4.5 percent and 23.2 percent, respectively.
The increase in tea export receipts reflects higher prices due to demand from traditional markets, while the higher manufactured export receipts reflect strong regional demand.
Imports declined by 11.9 per cent in the 12 months to August 2023 compared to a growth of 16.0 per cent in a similar period in 2022, mainly reflecting lower imports of infrastructure-related equipment, manufactured goods, oil, and chemicals.
This translates to a reduced trade deficit, a positive move for a country that is a net importer.
Tourist arrivals on the other hand improved by 34 per cent in the eight months to August 2023, compared to a similar period in 2022, and increased by 55 per cent in August 2023 compared with August 2022.
Total remittances hit $4.1 billion in the 12 months to August 2023 and were 3.2 per cent higher compared to a similar period in 2022.
The current account deficit is estimated at 3.7 per cent of GDP in the 12 months to August 2023 and is projected to improve from 5.1 per cent of GDP in 2022 to 4.1 per cent of GDP in 2023.
The CBK foreign exchange reserves, which currently stand at $6.9 billion (3.70 months of import cover), continue to provide adequate cover and a buffer against any short-term shocks in the foreign exchange market, the apex bank said.
Kenya’s banking sector showing resilience
Going forward, however, the banking sector remains stable and resilient, according to CBK, with strong liquidity and capital adequacy ratios.
Growth in private sector credit stood at 12.6 per cent in August 2023 and 10.3 per cent in July. Manufacturing (19.6 per cent), transport and communication (24.9 per cent), trade (9.4 per cent), and consumer durables (12.7 per cent) experienced strong credit growth.
“The number of loan applications and approvals remained strong, reflecting resilient economic activities,” Thugge said.
The MPC noted the ongoing implementation of the Financial Year 2023-2024 government budget, which continues to reinforce fiscal consolidation.
According to the CBK governor, the committee assessed the progress in the implementation of the new monetary policy framework, which is based on an interest rate corridor of 250 basis points around the Central Bank Rate (CBR).
Furthermore, the MPC noted that interbank market activity has increased while volatility in interbank interest rates has reduced. Additionally, spreads in the interbank interest rates have narrowed with improved liquidity distribution.
Risk profiling of borrowers
Meanwhile, Kenyan banks are embracing a smart lending approach known as risk-based lending. This arrangement allows customers to secure loans as per their individual risk profiles, which, in turn, determine the interest rates payable.
This means that borrowers perceived as riskier might face higher interest rates compared to those with a solid credit history. As part of this approach, banks ought to take into account a borrower’s credit score alongside other factors when deciding whether to grant a loan.
This shift aims to make credit more accessible to borrowers, particularly micro, small, and medium-sized enterprises (MSMEs), by offering them loans at rates that match their creditworthiness.
The Central Bank of Kenya (CBK) highlights the importance of honoring payment obligations on time. By doing so, individuals can establish a positive credit history based on their payment behavior, making it easier for them to secure loans at favorable rates.
In cases where borrowers face difficulties repaying their loans, CBK advises proactive communication with their lenders. It’s also a good idea for borrowers to regularly check their credit reports to monitor their credit scores and ensure the accuracy of the information. Individuals in Kenya can access one free credit report per year.
Read also: The Big Problem with Credit Scores